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RBI may relax ARC share sale norms

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The Reserve Bank of India (RBI) is likely to remove a major hurdle that asset reconstruction companies ( ARCs) face while raising funds via initial public offering ( IPO). According to norms, ARCs have to take prior regulatory approval to sell more than 10 per cent stake.
Sources said RBI would give exemption to the ARCs on this issue. " The regulator is not saying that ARCs cannot sell more than 10 per cent. If they want to sell more than 10 per cent, they have to take the regulators approval. However, that exemption can be given during an IPO." An entity that holds more than 10 per cent stake in an asset reconstruction company is classified as a sponsor.
ARCs also face problems while raising funds as the regulation caps a sponsors stake at 49 per cent.
With bad loan sale market gaining momentum following certain regulatory relaxation, ARCs are now looking to raise capital. According to a CrisilAssocham report, capital constraints along with expectation mismatch on valuations and longer resolution time frames are some of the biggest impediments for these companies.
The need for more capital by ARCs has also been necessitated by the change in the norm, which requires them to pay 15 per cent cash upfront to the banks for buying a stressed asset, compared to the five per cent earlier.
With the increasing menace of bad loans in the system, it is believed that the importance of the role played by the ARCs will increase.
To encourage banks to sell bad loans, RBI has allowed lenders to spread the losses arising out of asset sale for eight quarters. However, this is a onetime window that is available till the end of the financial year.
The Crisil report also points out that although the gross non- performing assets (NPAs) of banks will edge up in this financial year by 20 basis points to 4.5 per cent of advances, or by Rs.60,000 crore to Rs.4 lakh crore, only a fifth of the incremental NPAs are likely to be sold to ARCs.
Bad loans worth Rs.11,00012,000 crore will be bought by ARCS, thus underscoring a low systemic absorption, the report noted.
The rating agency estimates gross NPAs of the banking system to reach Rs.4 lakh crore by March next year.
Buisness Standard, New Delhi, 19th August 2015

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